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Treasury Auctions are Worrisome

These treasury auctions are getting a bit worrisome—it is exactly what I feared the most–simply that folks want the U.S. congress to get their fiscal house in order to raise their comfort level when buying government debt. Fat chance of this happening. Yesterday a giant supply of 2 year and 5 year notes hit the markets and with tepid demand rates had to rise–this is how it works.

I had previous written that I thought the 10 year yield would ‘drift down’ until the fall and then rates would take off higher based simply on too much supply—it is simply and supply/demand issue.

Today the 10 year treasury yield is up another 7 basis points to 4.61% after being as low as 4.32% in the last couple of weeks. Thus far income issues (preferreds and baby bonds) have only fallen mildly—but you can be certain that they WILL follow interest rates–they always do, although sometimes there is a lead/lag situation.

This certainly doesn’t make me want to run out and buy more baby bonds–we’ll see where we go.

43 thoughts on “Treasury Auctions are Worrisome”

  1. Things I can’t fix: growing national debt and payments on the debt. Not losing sleep.
    Things I can do: Imagine 2-3 likely scenarios for t-yields and make investment decisions. Having a plan reduces anxiety.

    Scenario: 10-year yield rises to 5.2%. Callable CDs at 6%+. Callable agencies at 7%+. Should I buy 10-year notes or the callable yields? Recession odds will be higher.

  2. If that 2 yr yield doesn’t come down on its own, fat chance you will see a Fed rate cut, unless the Fed agrees they will cut with higher than 2% inflation as the new normal.

    Fed needs to start buying treasuries again. And at some point US citizens will need to be ‘patriotic’ and buy this treasury debt. That will be its own form of tax in the form of opportunity cost.

  3. I believe the Japanese have been able to manage yields – YCC – the fed can do it too, if they really want to.

    People have been complaining about deficits and debts forever now and nothing has gone wrong. I don’t see why anything has to change – seems more like a storm in a tea cup
    classically – everytime we have an election, these talking points about “unsustainable debts” start being talked about, and as soon as the elections are over – everyone goes back to business as usual.
    I don’t think people have thought about what happens if the federal debt starts falling.

    1. I believe the only year that the US national debt ever declined, was in January 1835, under President Andrew Jackson. At that time, federal lands were sold & the budget got axed & US debt was cleared. After that, we’ve had 189 years of growing debt which has become exponential in growth in the 21st century. With neither party willing to raise taxes or cut benefits coupled with a low US birthrate that won’t replace the preceding generation, I believe it might be wishful thinking for the national debt to decrease on its own as you posited.

      1. Newbie, ACTUAL debt in dollars did decline dramatically in Andrew Jackson’s time to almost nothing, but climbed gradually up until the Civil War. Debt increased during the Civil War to over $2 Billion, but dropped afterwards to under $2 Billion until the early 1900s, when it creeped back up and ballooned to over 28 Billion for WWI by 1919. It then declined to just over $19 Billion until FFDR’s time. Since then there has been no declines in any year. Big jump to around $258 Billion by 1945 for WWII. It hit a trillion dollars in 1980 and then lit the fuse on the rocket ship to where we are today, over 35 Trillion. However, if you look at debt to GDP you will see some pretty major declines in that ratio after the wars.

        1. Since all of us own all the assets, doesn’t that mean we are the beneficiaries of all this? Get to enjoy towns and cities and roads we had no part in building. If I got a call on 500k (750?) that represents a share of the debt and had to spend it for the five of my immediate family members, I’d just do it. While I understand, deeply, that most American’s have no assets at all, the whole of the real estate market and equities market etc is well over 10x the debt. So, none of this appears to be any issue, just an advantage that post-war america is glad to have. tax deferred assets be scared.

          1. I bet current treasury investors eventually want their principal back & coupon payments in cash rather than buildings or equity swap if things ever get financially bleak.

    2. The Japanese are the poster child for stagflation. not something to aspire to.

      With their rapidly aging/shrinking population, there is not a clear way for them to dig themselves out (that i can see).

      1. There is only one way to fix an aging population.

        Two case studies of rapidly aging populations:
        Japan and the US
        Japan makes it super hard to immigrate, and very few people immigrate there because of the unfamiliarity with the Japanese language.
        The US has also made it super hard to immigrate, as the quota system by country does not take into account the relative sizes of each country, and while Norway has 20,000 slots and only about 100 are filled each year, the big 4 of other countries have decades long waiting lists and our immigration system can be gamed pretty easily in some respects.
        (China, Mexico, India and the Philippines)

        1. I agree we need immigration. Wish we had a functioning Gov that could put in place legal immigration. My Canadian friends tell me how their country welcomes immigrants. I point out that their immigration requires an immigrant can produce economically AND no “chain” immigration (another words one moves to CAN and one cannot bring family). For all our bad press, USA looking the other direction has opened the doors more than any nation.

          As for low population growth. GOOD. One looks at statistics to see the economic price a woman pays for having children. Women with no children are almost on par with males; but having a child puts a woman in the back of the line.

          Not in my lifetime, but one day I believe women will be recognized and economically rewarded for bringing and nurturing a new life. Doing that with a career is the hardest thing I or any working mother have done.

          In the meantime, the immigrant women with no economic opportunities will bear the children that will support this country.

        2. Hey Justin,
          I spent a several years as a (“foreigner”) executive in a Japanese company and I had first hand exposure to Japan’s population problems.

          Japan would love to have immigrants. they just can’t figure out how to attract and retain them (can’t get out of their own way).

          The problem in Japan is not really the language. Its not really that hard – far easier than Chinese (IMHO). The problem (again, IMHO) is that Japan has such a homogeneous population that “foreigners” simply aren’t allowed to assimilate into Japanese culture, even if they learn the language.

          two anecdotal examples:
          -Bunch of years ago, Japan tried to entice a bunch of people from Peru (IIRC) to come to Japan to work as caregivers for aging Japanese (Peru has a lot of historical immigration/connection to Japan). Gave immigrants language and cultural training, etc. and a 5(?) year employment contract that led to permanent residency. Pretty good deal for third-world immigrants, at least on paper. At the end of the program, basically all the participants went back to Peru. They were constantly treated as outsiders, no opportunity to assimilate into Japanese culture. Just culturally “forced” to remain separate – very lonely. It sounds “racist”, but I think it is just a complete lack of exposure of most Japanese to anyone who is not Japanese, so they have no idea how to interact.

          -For about 50 years, Japan controlled Taiwan and for about 35, they controlled Korea (essentially as colonies). Ended in 1945. People who were born in Taiwan or Korea (even to Japanese parents) and who immigrated back to Japan were considered “foreigners”. Even today, if someone has even one Korean or Taiwanese ancestor (by now, grandparents or great grandparents), they are considered “foreigners” – even if their families have been in Japan for multiple generations, they attended Japanese schools, and they speak perfect Japanese.. The homogeneous Japanese culture just can’t accept non-Japanese into the culture.

          Japanese culture can tolerate foreigners (as long as they recognize they are foreigners and act accordingly). There is a very vibrant expat community in Japan, but they are NOT treated as part of Japanese culture. I know several American families who have been in Japan for 2-3 generations and speak fluent Japanese, but they are still treated totally as outsiders. We had one family whose kids used to go around with our kids. It was funny to see the reaction from most Japanese when those kids opened their mouths and spoke perfect Japanese – like they saw a bear talking.

          it says to me that Japan isn’t going to pull our of its population nosedive anytime soon.

          1. When you say “treated as outsiders”, what does that mean? Were they barred from eating at local restaurants? Constantly harassed while they were walking down the street? Charged prices that were 25% more than the home team?

            1. NewToThis The Dalio book mentioned on this thread has Japan 1989-2017 as an example of a deflationary debt crisis goes into some detail as a case study. What is interesting is that Japan equities have only just come back to 1989 levels. Imagine a major developed economy and industrial powerhouse trading at 1989 levels. Their 10 year just recently crossed 1%.

              FWIW they do appear to be making progress on the equity valuation front and are developing policies intended to drive stock of listed firms above book value.

              It’s cheap.

              Buffet has been a buyer and he has also been a issuer of Yen denominated debt. Bascially borrowing cheap, shorting the yen and buying equities.

              The US individual investor can implement a similar approach with DXJ which is a currency hedged ETF focused on Japanese equities.

              1. The deflationary debt era was largely set up by the crazy one time 80s decade run up there from what I have read. I remember reading crazy stuff like this below back in the day…
                Edward Chancellor, in his book Devil Take the Hindmost 5 provided stats on the Japan real estate and stock market bubble from the 1980s:

                Land prices increased 5000% from 1956 to 1986 though consumer prices only doubled in that time.
                In the 1980s, share prices increased 3x faster than corporate profits for Japanese corporations.
                By 1990, the total Japanese property market was valued at over 2,000 trillion yen or roughly 4x the real estate value of the entire United States.
                The grounds on the Imperial Palace were estimated to be worth more than the entire real estate value of California or Canada at the market peak. :exploding_head:
                There were over 20 golf clubs that cost more than $1 million to join.
                In 1989, the P/E ratio on the Nikkei was 60x trailing 12 month earnings.

            2. “Foreigners” (incl. the kind of folks with one “korean in the woodpile”) were not hired into gov. jobs, not hired by many major companies, not accepted by major universities, not allowed to marry into many families, etc. There aren’t laws that mandate it (that I know of), it is just how their cultural norms work.

              I remember when there was a big front page story (early 2000s?) about how a local government near Tokyo was being so “progressive’ because it had hired its first foreign employee – a guy with one Korean grand parent (or great grand parent? – can’t recall which) who had lived his whole life in Japan (as had his parents and grandparents), etc.. Progress, but (a) such a tiny step so recently, and (b) so “tone deaf” that it made the front page, that it I think it shows how far the Japanese have to go to becoming accepting of immigrants.

              None of this is to say that other countries (incl. the US) don’t have our own cultural issues, just that Japan is starting in a pretty deep hole.

              1. Wow. Those things are certainly a deterrent for sure. Not sure you can attract the best and brightest to live in that situation.

    3. Japan has an ace in the hole. Their postal savings bank, which is the buyer of a lot of that debt. But only countries that have a currency that is a reserve currency could get that high without the bond market punishing them.

      1. One of the economic challenges in Japan is that every Japanese girl is taught from an early age to save – and they do. Bank deposits are staggering (incl. the postal bank). the gov. tries to boost domestic spending by encouraging people to spend some of that money, but hasn’t been very successful. those deposits act as a huge buffer (absorbing bonds, etc.), but not what the gov. wants as they try to work out of stagflation.

        Somewhat similar problem in China – saving is a strong cultural norm (esp. for women) and a lot of money sits in banks because of it. We seem to have the opposite problem in the US.

  4. Everytime I read an article about the gigantic debt hanging over the US coupled with the chilling statistics Newbie posted I don’t sleep well that night. The stupidity / (or fill in the blank) of the politicians in both parties over the last decades to get us in this predicament is beyond comprehension. I pulled my tax returns from 1980 before the 1981 tax cuts that began this craziness and compared them to 2023. The percentage paid in taxes is remarkable. I have been converting my conventional IRA to the Roth every year just avoiding the IRMA costs to the point my Roth income is now greater than the IRA. Hope that the politicians don’t do too much damage to the Roth when the S*** hits the fan and they deal with this situation. Anyone who thinks taxes aren’t going up and all of this can be solved with budget cuts, well, I want some of what they have been smoking!!

  5. US Debt Clock tells us why Treasury auctions are worrisome…

    * US National Debt – $34,777,784,047,697
    * US debt per taxpayer – $266,952
    * US debt per citizen – $103,266
    * US budget deficit in 2024 – $1,831,269,170,750
    * Interest on US debt – $839,141,329,133 (almost = defense budget)
    * US debt / GDP ratio – now 122.27%, 34.59% in 1980
    * Credit Card debt – $1,338,197,551,694 or $8,312 per holder
    * Student Loan debt – $38,957 per student
    * Personal debt per citizen – $75,860
    * Savings per family – $7,610 (median)
    * Medicare – 64,860,806 enrollees
    * Medicaid – 87,979,286 enrollees
    * US birth rate – 1.62 births/woman, lowest since 1930, well below replacement rate of 2.1 births/woman needed to replace a generation.
    * Living in Poverty – 43,785,280
    * Food Stamps Recipients – 40,204,090
    * Homeless – 614,396
    * M2 money supply – current $20,941,116,259,197….$4,777,818,335,835 in 2000.

    ** Risk is creeping up in US Treasuries, so we’ll need higher rates to reflect the investment risk IMHO as neither party has the will for a balanced budget.

    1. Thanks for that disturbing set of stats!

      Yes, the fear of all fear. No one wants to buy Treasuries until rates are much higher. Talk about game over.

      1. At the end of 2023, the global sovereign debt was $313 trillion with the US piece of the debt pie accounting for 11.2% of the total. Hopefully, the US can remain the best house in a bad global neighborhood of debt. Current world central bank rates (Trading Economics):

        * Japan 0.1%
        * Switzerland 1.5%
        * Singapore 3.42%
        * China 3.45%
        * South Korea 3.5%
        * Australia 4.35%
        * Euro Area 4.5%
        * Canada 5%
        * UK 5.25%
        * USA 5.5%
        * Saudi Arabia 6%
        * Indonesia 6.25%
        * India 6.5%
        * South Africa 8.25%
        * Brazil 10.5%
        * Mexico 11%
        * Russia 16%
        * Argentina 40%
        * Turkey 50%

        1. Newbie – given your concerns and fondness for data I have 2 books farily recent books that migth be interested in:

          How to Listen When Markets Speak by Lawrence McDonald
          This book is ok in Audiobook format if preferred.

          Principles for Navigating Big Debt Crises by Ray Dalio
          Key takeaway – inflation debt crisis coming
          This book is more like a text book and must be read in hard cover format due to excellent charts and tables (unfortunately I need a magnifying glass for it)

          Both avaialble on Amazon.

          1. August ~ just read through the overviews of both books, both seem like decent reads. I’ll pick up a copy of McDonald’s book first.

            1. that one is less dense for sure.

              One interesting thing about that book is it’s reference to Marc Cohodes in refernece to FTX. Cohodes is a controverisal figure, and might currently be in the process of “jumping the shark”. His current escapades at B Riley have been fun to watch and have been profitable (for me at least), but he may have (embarassingly) overplayed his hand.

              Anyway its a good read. Author likes Barrick for some reason as a gold miner, there are far better choices.

            1. That is definitly the Dalio book. It overviews two primary types of debt crises (deflationary and inflationary) the then gives detailed historical examples of each in case study format. I prefer the hard cover, but the PDF would work as well. It is very much a text book, so it is farily dry reading.

    2. Some interesting things caught my eye:

      1. Medicare enrollees are 23 mil LESS than medicaid recipients.
      2. Medicaid recipients are double the number of people ‘living in poverty.’
      3. Birth rate is far lower than replacement rate. Lowest in almost 90 years.
      4. Personal debt per CITIZEN is about 10 times savings per FAMILY.
      So. Do we need more taxes and more (controlled) immigration? Or do we just continue to ‘gamble along with old Madama’…

  6. It seems to me that changes in real rates are driving 5-30 year Treasuries. It seems unlikely that changes in the fed funds rate will affect 5-30 year real rates very much. I agree that the surge in the supply of federal debt coupled with the decline in demand due to recovering rates in Japan are driving up real rates. I have read that the other change is the recent reversal of liquidity. The Fed’s payoff of reverse repo’s provided more liquidity than QT absorbed so the net effect has been to increased liquidity which has now ended. Please correct me if I have confused something in these points.

    1. Reverse repo blow out was due to not enough short term t-bills being issued by the treasury. This blow out occurred due to people taking their deposits sitting in banks at ~0% and moving them into money market funds @ 5%.

      Since then US treasury has unleashed a torrent wave of short term t-bills which quickly got gobbled up.

      Other form of liquidity is countries selling off US treasury reserves to fortify their currency. Essentially taking a 50% haircut to receive short term dollars.

  7. If we get a recession, at the same time that Treasury issues continue to flood the market, all of a sudden stagflation becomes a real possibility. Not what fixed income investors need—to say the least. That’s why when I do extend maturities, it’s in the F2F area.

    1. I was browsing for my 5 year IG ladder today and notied a 2029 FHLB 6% coupon offered a par. There was also a 6.25% FHLB 2034 also offered at par. Still like these callable intermediate Agencies with 5 year maturity (I’ll wait on the 10s for a better yield) – I just think the embedded call options are over priced and as a result these notes offer a great credit with superior yield and reasonable call risk (IMO).

      IG Corporates are no where the value you can find in agencies from what I can tell. I see zero reason to buy any IG corporate credit at these prices realative to Agencies.


        1. 🙂 didn’t say sitting on my hands, just not buying corporate bonds and prefer US Agencies.

          Been going back to the 90’s figuratvly and I am building a highly speculative position in the common stock of Argentina vertically integrated oil co. YPF.

          We complain about rates here, but YPF have some lines of credit at 140% so it can always get worse. Inflation can get worse too!!!

          For those lamenting the current state of US debt a review the history of Argentina is a preview of coming attractions.

          1. Did not imply you were, just saying chicken little (moi) isn’t doing much. 🙂

            As for the FHLB issues, if rates continue to rise, is that a concern or does one just forget about that and hold to maturity?

            PS – Did you post on the Can I Retire Yet site?

            1. Hey Rocky –

              I don’t know the Can I Retire Yet Site… but the answer is no I don’t have the disposition for it just yet. Also my wife won’t let me!

              FHLB notes will go down in value when rates go up and due to the embedded call option they are likely to go down more than Treasuries of equal duration.
              I do have some variable rate prefs to hedge against rising rates.

              My long term expectation is for rising rates, but I do expect purely politically motiviated rates cuts this year.

              I don’t use these notes as a vehicle to speculate on interest rates, and don’t try to time the rates market with my 5 year IG ladder. I have an allotment of notes mature every quarter and I roll out for 5 years every quarter. I go with the best deal at the time which could be Treasureis, Agencies, CDs or Corporates. This ladder is setup in case something happens to me so it’s intended to be emergency cash flow for a few years.

              1. Thanks for the reply August! I like your ladder strategy and I’ve not been disciplined enough to create a ladder like that. Sounds like a very good plan.

                As far as the Can I Retire Yet website, someone recently posted as “I am August West”, so thought it might have been you.

                Anyway, have a good day!

              2. Like you August, but I ladder out enough A- and higher IG for 8 years in retirement to fully cover expected living costs. There is about 15% well-vetted BBB in there. The rest is longer term IG bonds, REIT’s and other equities. It’s SWAN for us, but we have enough assets to do the ladder while being comfortable with volatility and some risk in the longer term investments

    1. The flood of corporate bond issues a month ago when rates were down and they rushed to market turns out it was probably a good idea on their part. If they had waited until the call date on some of the debt coming due in 6 to 8 months it could be at higher rates

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